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How Abbott Could Introduce Regulatory Agencies to Reality

Seldom has a regulatory agency become so thoroughly discredited as the Texas Alcoholic Beverage Commission, with seven high-ranking officials resigning in the last few weeks. Not only were agency officials caught boozing it up with the very industry they were supposed to be regulating, they also got smacked down for the overzealous and baseless prosecution of the state’s largest liquor chain.

Unfortunately, abuse and overreach is to be expected of regulators like the TABC. What’s surprising is that Texas — a state that has embraced a limited-government, free-market approach — still delegates and defers so much power to outdated regulatory agencies.

Most of these agencies were created in the 1930s and still reflect Progressive Era distrust of markets — but maintain faith in the beneficence of technocrats. Though they were created to protect consumers, regulatory agencies are themselves prone to a number of temptations.

The first temptation is known as “capture,” when agencies become too close to the very industries they were set up to regulate. If you want an example of regulatory capture, you can do no better than the taxpayer dollars the TABC spent attending boozy industry conferences in California, Hawaii and other locales.

Regulators are also tempted to occasionally go trophy-hunting — or prosecuting a company to justify the agency’s existence and expanded budgets. Something like that must have motivated the TABC’s three-year investigation — and threat of a $713 million fine — of Houston-based Spec’s, a family-owned foods and spirits chain. But judges recently tossed out TABC’s entire case against Spec’s. It turned out that the case hinged on wrongly characterizing a single transaction that any accounting major should have understood.

While the TABC is the focus of unwanted attention for its profligacy, the most harmful temptation for regulators is omniscience — and for that we turn to the Public Utilities Commission, which has twice denied bids to purchase Oncor, Texas’ massive-but-bankrupt electric utility. In 2016, the commission rejected an $18 billion offer from Hunt Consolidated — and this past April rejected an $18.4 billion offer from NextEra Energy that had already been approved by the Obama administration.

When regulators come to believe themselves omniscient, they think they know how an industry or a transaction should work — and they insist that companies bend to their regulatory will. Because, after all, they are important government officials; they wouldn’t have these jobs if they didn’t know best.

But the reason markets work where government often doesn’t is that markets deal in the real world of what is possible, not in the sugar-plum-fairy imaginations of regulators.

The Public Utilities Commission thought Oncor’s new owner should not control Oncor’s board. That’s right: In their delusions, three appointed bureaucrats at the commission imagined that someone should be willing to pony up $18 billion for a bankrupt company — but should not be able to control it.

The commission’s arrogance has invited chaos. Now, two other parties are bidding for Oncor, albeit at lower prices. What happens if a Berkshire Hathaway or Elliott Management offer is approved where the larger NextEra transaction was rejected? Won’t NextEra have a pretty compelling legal case against the Public Utilities Commission?

All of this would have been avoided if Texas’ regulatory agencies operated consistent with Texas’ free market rhetoric. In a free market, regulators are limited and do not attempt to manage industries or pick winners and losers. Rather, they let markets work. They let transactions take place. They only get involved if there is clear evidence of consumer harm.

Both the TABC and the Public Utilities Commission have significant openings at the commissioner and staff levels, so Gov. Greg Abbott has an opportunity to begin remaking both institutions.

If Texas is to continue to serve as a free market example to the nation, the Texas Legislature needs to drag our regulatory agencies kicking and screaming into the reality of free markets and limited government.